On Mon, 14 Apr 2008 19:12:26 -0400, Les Cargill cfl.rr.com>
wrote:

Sorry, but you are wrong on every count. Totally.

It's the entirely typical situation, to the point of being *universal*
because economic activity continues *to the margin*.

If selling gizmos produces a profit of 10, sellers will push it
further until it produces a profit of 7 (by bidding up supply costs,
paying overtime for labor etc) ... then until it produces a profit of
4 ... then until it produces a profit of 1 ... then stop when it is
not profitable.

Otherwise they are leaving profits behind "on the table", for nothing.
Right? Why do you imagine they would do that??

Thus, *any* tax will deter economic activity to create deadweight
loss. A tax of 1 stops sales with a profit of 1, a tax of 5 stops
sales with a profit of up to 5, etc., all with NO tax revenue
collected from the deterred sales, but the economy shrinking.

Similarly with labor. All up and down the wage scale there are people
*just at* the marginal point where it pays for them to take a job.
Right?

For instance, a married couple's lowest earning spouse has a job that
*just pays* for the nanny and for the maid to come in once a week
etc, as is needed for her to spend days at work. Increase the tax on
her wages and it no longer pays enough -- she stops working, and the
nanny and maid find themselves unemployed too. The effect of the tax
increase on these marginal workers is a reduction of economic
activity, and a reduction of tax revenue to the govt as well.

Any tax will have these effects, from the first dollar.

You can't refute this logically, if you have any common sense.
To try you'd have to say:

"Yeah, obviously a very large tax would stop an economic activity, but
small ones have no effect to deter activity at all -- the deterrance
just occurs *all at once* -- zap! like magic! -- with one particular
extra penny of tax!
"So I deny, deny, that the effect of a tax in deterring economic
activity -- which is self-evidently obviously at high enough rates --
rises incrementally as the tax rises. It just appears all at once at a
*poof* magic tax rate number, and not at all before!!!"

Which is silly.

Increasing tax on something is just the same as increasing the *price*
of it.

Do you really think that increasing the price of something has a
steady incremental effect on demand for it from the start, but
increasing tax on the same item incrementally does not???

Tha's obviously boneheaded, so if you thought about for a moment you
would neither say it nor believe it.

The deadweight cost of tax is felt from the first dollar of tax -- to
say otherwise one must deny the marginal nature of economic activity.

The cost may be very low at the first dollar, but it rises
exponentially, with the *square* of the tax rate.

This is why one of the cardinal precepts of taxation is "to obtain
significant revenue use multiple taxes at low rates rather than one
tax at a high rate." Because deadweight cost rises with the *square*
of the tax rate.

If you want to deny the existence of deadweight loss from all taxes,
fine, but you are saying every textbook back to Adam Smith's Wealth of
Nations, literally, is wrong.

But by Occam's Razor, who is more likely to be wrong in that case?

Let's see what other errors you have in that one paragraph:

Wrong. There's reams of data on the deadweight loss of all different
kinds of taxes.

Wrong -- because deadweight loss results from the first dollar of any
tax, there is no possible way the government can avoid it.

Of course politicians can indeed be remarkably thick about the
economic cost of taxes -- see again the luxury tax on boats that
devastated the boat making industry. And there's no shortage of
examples of politicians trying to tax or regulate the market away.

But more often, politicians *don't care*. Politicians just want to get
their tax revenue in the *politically* most expedient way -- not the
economically most expedient.

And the deadweight loss cost of taxes, when it is only up to moderate
(below industry destroying) levels, is largely invisible politically,
because nobody pays it in tax collections.

That's the political perversity of it. It's far *more costly* to the
economy than actual taxes collected which get recycled through the
economy through govt spending. Yet people only see the latter, because
those are the only taxes they write out checks for -- they don't write
out checks for deadweight loss. Unemployment, slow growth, all that's
just fate, they think.

Take you, for instance.

You personally suffer much more loss from the deadweight loss cost of
taxes than you do from taxes collected from you that are recycled to
buy a $600 hammer for the Pentagon -- but while the latter may anger
you when you read about it, you don't even believe the former exists!

Not for all the econ and public finance textbooks in the world, nor
even the papers you can read right here in this thread linked to the
NZ Treas.

The total cost of taxes equals tax revenue collected, $T, + deadweight
loss cost, $X, with the latter rising with the square of the tax rate.
For the record, Martin Feldstein, president of the National Bureau of
Economic Research, estimates the deadweight loss cost of the US income
tax to be $1 per $1 collected. So for an extra dollar of tax to be
beneficial it must be spent to provide >$2 of benefits -- covering
both the $1 deadweight loss + the loss suffered by making the original
recipient of the income unable to spend $1 of it.

With income tax figuring to rise 50%% in the forseeable future on
current law to service the boomers, we can figure its deadweight loss
to rise by the square -- 125%%.

Optimizing income for whom? ;-)